Kurt Tong: Why We Still Need Economic Diplomacy

In the latest episode of Pacific Polarity, Ambassador Kurt Tong offers sharp reflections on American diplomacy in Asia. He underscores growing demands on the State Department’s capacity, particularly as issues like trade increasingly intersect with domestic politics, requiring careful coordination across multiple U.S. federal agencies

Jersey Lee

Welcome to this episode of Pacific polarity. Today we’re speaking with Ambassador Kurt Tong. Ambassador Tong is Managing Partner at The Asia Group, where he leads consulting teams focused on Japan, greater China and Korea, and on East Asia regional policy matters. He is a former senior U.S. diplomat with around 30 years of experience, including roles as Principal Deputy Assistant Secretary for Economic and Business Affairs, ambassador to APEC, consul general in Hong Kong, and as director for Asian economic affairs at the National Security Council. A key architect of the Trans-Pacific Partnership and U.S.-Korea Free Trade Agreement, he also played a leading role in the Six-Party Talks with North Korea, and U.S. economic engagement across the Asia-Pacific. Ambassador Tong, great to have you on.

Kurt Tong

Great to be here.

Jersey Lee

As Consul General to Hong Kong and Macau through much of the first Trump presidency, were there ever times when you found out about a new US policy via tweet, and how did you handle that situation? What would be your advice to your former colleagues, given the higher stakes in this second Trump presidency, on managing diplomatic relations with this uncertainty looming over them?

Kurt Tong

I think that President Trump is, as you note, well known for using a variety of ways to get out his message. He's used his social media, I think, more than any president has to both conduct political debates as well as make announcements about his objectives with respect to policy, so that's different. Every president will change policy and find different ways of explaining that, both to other governments, to their own government, to the congress, to the public, so I tend to focus on more the policy itself rather than the delivery mechanism.

What you're implying, and I think it's quite self-evident, is that in the second Trump administration, the president has come in with a high degree of determination to change a lot of things about US policy and about the conduct of the US government.

So that's a well-known fact and, I haven't worked for the administration for six years, so I don't have any direct experience with the second Trump administration. But it's certainly a different type of administration than a lot of people are used to.

Richard Gray

At a recent congressional hearing, Wendy Cutler argued the cultural challenge within the state department is that economic affairs tracks are viewed as less desirable than the political affairs tracks. Do you agree that this is a substantive issue, and if so, what can be done to remedy the undervaluing of economics within American diplomacy? Especially as we think about Asia, where politics, security, and economics are pretty intricately intertwined.

Kurt Tong

I don't know the context in which Wendy said that. I was, for a couple of years, as you noted in the introduction, the principal deputy to the Assistant Secretary and the Economic Bureau of the State Department. And when a gentleman named Charles Rivkin was my boss, the Assistant Secretary, Charlie and I were conducting a very concerted effort to strengthen the economic function within the State Department. Because for decades, really, the question of how economic policy get made and how does the State Department get involved in that process and shape it, and then coordinate the other aspects of foreign policy together with economic policy.

I've thought about this problem a lot. It's not a recent thing by any means. I actually think that the recognition both publicly and internally of the importance of economic policy in diplomacy is continuing to go up year by year, including in the current administration; the difficulty is how do you institutionalize that and then how do you carry it out in practice.

So one of the problems for the state department is that it doesn't have statutory authority over the making of international economic policy; financial policy is made by Treasury Department, trade policy by USTR—all this is more complicated than just one agency, but the lead agency is USTR; agricultural by Agriculture; industrial promotion and trade controls, which have become more and more important recently because of US-China friction, by the Commerce Department; energy policy by the Energy Department, and so on down the line.

The State Department traditionally only had management over a few narrow areas. Back when the US had textile quotas, the State Department did textile quotas. The aviation negotiations have traditionally always been done by the State Department. And then the State Department has had some statutory authority over economic sanctions and also has had some authority over licensing of military related exports. Having foreign service officers at embassies work in the state department in Washington and then still know enough about this very complex policymaking process, to do a good job, is really complicated.

So what we were trying to do is increase the opportunities for diplomats to get experience on US domestic economic policy formation, because unlike human rights policy for example, something that affects other countries more than affects the United States, trade policy affects the US as much or more than it does the counterparty country, so it's absolutely a matter of both domestic policy and foreign policy.

In that context, it's unrealistic for the State Department to think that it's going to be put in charge of everything, and be allowed to decide everything for the U.S. So in that context, knowing more is the way to empower the diplomats to make them more effective. A lot of efforts have been made over the years to try to strengthen that—the individual capability to understand the issues and negotiate them with foreign governments—because that's often required of economic issues focused diplomats. And I think a lot of progress has been made.

Recently, I'm quite concerned about the downsizing of the State Department functions and the removal of one of the most important tools of foreign economic policy, which is overseas development assistance.

So more than the issue that you cited and the way that you cited it, I think the deeper concern is, is the State Department maintaining its full functionality given the intense budgetary and political pressure that it's been put under? And is the U.S. giving away some of its most important tools of foreign economic policy, which is development assistance? And I think I'm very concerned that the answer to both of those is bad.

Richard Gray

Yeah. And as a related note, one of the things that I wanted to talk about was the role of investment, both public and private. And so, through your work at the Asia Group, how do you think about the role commercial relationships play in enhancing these bilateral relations?

While the United States currently is restricting market access through tariffs and some upping the ante of export controls, it still is a pretty large recipient of and disperser of FDI in the Asia-Pacific. A little over a year and a half ago, I attended an event with Singaporean Ambassador Lui, and he says something along the lines of, China is our largest trading partner, but America is our most important investor. And while investment and trade in consort would certainly be an ideal for more comprehensive economic engagement, to what extent can private sector investment be a stopgap for these market restrictions? And as you're indicating, this is perhaps even more pressing with the closure of USAID, where private investment is both going to have to fill the diplomatic gap for trade access and public investment. How do you think about these things playing out, the role that companies are playing, and perhaps the broader aperture of what U.S. diplomatic relations might be like with some of these valves cut off?

Kurt Tong

Yeah, that's a very complex question that you've asked. The U.S. is both the number one source of outbound direct investment, portfolio investment, financing in general, as also the largest licensor and supplier of productive technology. And those often go together. the money and the technology and the managerial capabilities that go with them.

It's also the biggest host of inbound investment because it's the largest economy, and traditionally has been very, very open for the most part to foreign investment in the US, because foreign investment is good for an economy.

The political view of outbound investment over the years has varied and been a bit contradictory; so when people think about, do we want these Fortune 100 companies to be successful and have their stock prices go up and create more jobs in the United states, the answer is yes; these companies often say that in order to grow and be successful, they need to be globally competitive, not just competitive inside the United States, and they say that in order to be globally competitive, they often need to invest overseas and produce overseas and often produce and import things back to the United States that have been produced overseas, because those are cost-effective approach to making money and growing their companies.

The political contradiction comes not from, if you ask any politician or American citizen, do you want your most successful companies to be successful? They say, oh yeah, we want that. If you ask them, should they be allowed to invest freely in other countries and leverage economic growth in other countries to the benefit of US shareholders? They say, yeah, that sounds great. But then if you say, should US companies build factories overseas to produce stuff and sell it back to the United States, you get a very mixed view because the conversation becomes that those jobs are being exported.

And you hear that term a lot, right? That the US is, these companies are exporting jobs. That may not actually be true in most cases, but the perception is there. And in the current political environment where the Northern Midwest is the key election battleground for the presidency, seemingly one election after another, at least for the last three or four or five cycles, and the swing votes have been in areas heavily affected by the decline of traditional industrial manufacturing, then the political focus in the United States has become even sharper on this question of, are we manufacturing enough in the United States, particularly traditional manufacturing. Traditional manufacturing has more jobs than advanced manufacturing, which is more robotic and data oriented rather than heavy metal bending, process-oriented type manufacturing.

So the political dilemma becomes that there's a whole wave of belief that it's bad for the US that, for example, most of the shipbuilding in the world has shifted to China, and the U.S. has almost none except for some Navy shipbuilding. The pendulum has definitely swung in a lot of these areas politically, saying we want some of this manufacturing back in the U.S., even though it might be unprofitable or expensive. and because Americans get paid a lot—it's a high income country, right, and people like that right, they're not going to be willing to get paid the same wage to make ships in the United States as a Chinese shipbuilding worker—but they still want to have it done in the US anyways.

So that's the dilemma that we're in now, that is driving a lot of the debate around trade policy, and it's very closely linked to investment policy.

So foreign affairs people thinking about—getting to your actual question after my little diatribe there—the foreign affairs people think, well gosh, yes, we need foreign companies to be really active and positive about US corporate relations with other countries, to put the best face on the United States, especially if the U.S. government's no longer doing that itself by cutting the aid budget and being protectionist on trade policy, we need the companies to step up and be the more positive face about working with the United States. But then back home, there's counterpressure. And that drama of where U.S. policy is going to land given this pendulum swing towards protectionism and wanting to reshore investment and jobs back to the United States.

I don't know where it's going to land, but it's a critical issue for this current era. And we're watching it play out in front of our eyes in terms of U.S. policy.

Richard Gray

To stay on trade for just a moment, looking at the landscape, following the April 2nd announcements of reciprocal tariffs, the details of what this means for existing U.S. free trade agreements is uncertain, but it looks like there might mean an unraveling for a number of these existing deals, including U.S.-ROK, U.S.-Singapore and others. At the same time, we're in a moment where we've rolled back, obviously, TPP, we've rolled back participation in IPEF and all of these other existing arrangements.

Looking at the continuing rolling back of each of these different functions, what is your thought on the potential for some industry specific or digital agreements? Do you think there's any political calculus there? So if it's the UK, for instance, which has already signed one general agreement with the United States, a digital services agreement with the US, is that something that you think might have any space here, let alone in Asia where the tariff situation seems a lot more dire with higher tariffs and more engagement with China, which is a more complicated issue in and of itself? What the US philosophy and approach will be to plurilateral, let alone bilateral agreements in trade going forward on specific narrow issues also seems quite uncertain. And so, maybe peeling the onion a little bit more, what exactly is the prospect and potential vision for what a future U.S. trade policy might look like?

Kurt Tong

Good question. I'm not sure. I do think it's quite clear that there will be trade agreements reached bilaterally between the U.S. and many countries within this year, because the U.S. is threatening dire consequences if there aren't some agreements reached; dire consequences being the high tariffs that were announced on April 2nd. I don't think the U.S. will implement all those tariffs at that announced level, and I don't think the U.S. even wants to do that now. They always wanted to leverage agreements. The appetite for keeping tariffs high is less than it was in March before all this happened, because the president has discovered that tariffs are actually unpopular in the United States, and they cause inflation, and people don't like it; but he still likes tariffs, he just knows that other people don't, so he's moderated his stance somewhat.

With his stance moderation and the need for all these other countries to do business with the United States, I think there will be a whole bunch of agreements reached, which are very bilateral, transactional, and are mostly just preventing, lowering the amount of bad stuff that happens, rather than actually producing anything positive in terms of economic integration or growth. And that's where we are.

Now, you asked about plurilateralism and multilateralism and digital services and things like that. The U.S. has an emerging view on how digital services should be traded and invested internationally, and it's starting to come together into something that's a little more coherent. It's in favor of less restricted rules, in favor even of cryptocurrency as a tradable commodity perhaps internationally, it is relatively relaxed about regulation of artificial intelligence and the emerging technologies in that space; not completely, however: it's very obvious that the US is concerned about the antitrust aspects or monopoly power that's sometimes exerted by larger digital services companies, and is pursuing cases against them, even in the US. So it's not entirely tech friendly policy, but it's pretty tech friendly. And there's both political and substantive reasons for that.

I think that the US will both bilaterally and then in some cases, plurilaterally push or some degree of consensus on those issues that I just described. Complicated stuff, and I think it will be difficult to reach agreements easily, but I do think there will be an effort to do so, more likely plurilaterally than multilaterally.

You've clearly been reading into the literature about the Asia-Pacific regional trade policy. One of the things that people like Wendy Cutler, who you cited earlier, or myself have been advocating, is doing a regional digital services agreement that is at least a little bit better than the least common denominator in terms of understanding trade, what the policy should be on questions like cross-border data flow, data nationalization, and data privacy. And that, I think, is possible but difficult. And eventually, during this administration, there will be more effort put into that, I think.

Jersey Lee

Recently, Japanese Prime Minister Ishiba and Korean President Lee Jae-myung had a rather positive meeting at the G7 summit. President Lee described the relationship as inseparable and, while mentioning historical issues, also stressed a willingness to develop a partnership in a future-oriented manner. This all seems rather positive. especially coming from someone who previously exhibited much more anti-Japanese tendencies.

Much of their bilateral relationship, however, appears to be anchored in security. So what about the economic relationship? Is that something the U.S. can still play an important role in, or will China be able to effectively push their trilateral economic partnership forward?

Kurt Tong

You mentioned four countries, Japan, Korea, China, and the United States. And I think the dominant theme will be exploration of and adaptation of the bilateral rather than multilateral. I do anticipate further progress in US, Japan, Korea, security cooperation, including trilaterally, and the statement by President Lee is really important, and shows that Korea writ large, including the Democratic party, has at least to a significant extent is willing to turn the page on some of the disputes of the past with Japan, and push forward with cooperation, perhaps gradually on the security front, but even including on the security front. And that creates an opportunity for the trilateral cooperation to get to further deepen.

Now, there's going to be some stress between the U.S.-Japan security relationship and on the U.S.-Korea security relationship, because of the transactional nature of President Trump's approach to things, and the U.S. sense that other countries need to pay more of their share for the collective defense. And so that will create some stress. But I'm optimistic that the trilateral formulation will hold and be successful in the security realm.

I don't see much there in economic policy. Maybe some on economic security cooperation, for example, on trade controls vis-a-vis China. But, for example, I would be shocked if there was something like a US-Japan-Korea trade agreement. There is more potential in the Japan-Korea space. One of the things I've been advocating with Japanese colleagues for years now is that Japan earnestly recruit Korea to join the Trans-Pacific Partnership, and prioritize Korean membership in it.

Now, Korea's had mixed feelings about it, because of the commitments involved and the negotiation process. Korea has in the past had a little bit of free trade agreement fatigue, because of the extraordinary difficulty of negotiating the FTA with the United States, and now the U.S. is abusing that agreement. So Korea's had mixed feelings about it, but I still think there's a lot of potential there in that bilateral space.

Concerning China, China will try to do some more Japan, Korea, China economic relationship deepening, but will probably be unsuccessful because China's quite closed market still, and doesn't seem willing to do the kind of dramatic unilateral market opening that would make it an equally accessible market to the degree that Korea and Japan are accessible to China. And so, in fact, Korea and Japan are in the process of closing some of the doors to Chinese participation in their economies for security reasons. So I'm not at all optimistic about that trilateral. I think they'll have some meetings, they'll talk, blah, blah, blah, and make some announcements that are pretty non-substantive.

Richard Gray

Looking at our current political moment, it's not hard to see why volatility in Asia is so pronounced. The region's economies are both regionally integrated, but also interconnected with American supply chains. Vietnam, of course, is the most sort of radical case of this, about 28% of its goods are exported to the United States, 30% of their imports are from China. As we deal with the proliferation of dual use technologies and then their corresponding export controls, and as you've talked about, some of these restrictive competition policies, and then in general, the securitization of economics and trade, these challenges of compliance and the difficulty of measuring risks are intensifying for private actors.

And so, to as much or as little detail as you feel comfortable describing, as you're advising your clients in this landscape, what are some of their common concerns? What are the roadblocks to achieving these market entry points? And as a broader note, how are the current dynamics informing corporate strategy about dealing with this moment?

Kurt Tong

Yeah, that's a great question. This is what I do in my day job. With clients, what my company, the Asia Group, offers is information, analysis, insights, and then advice about what the situation is with respect to the kinds of policies that you've been describing, tariffs, export controls, trade controls, but also industrial policy, domestic economic policy, liberalization measures that different countries take to try and attract capital or trade.

With clients, we talk about regulatory risk, operational risk, and reputational risk. The biggest of those is the regulatory front these days, and we try and help them.

It's also opportunity, not just risk. So in each of those vectors, we help them understand what the situation is and then plot a strategy. A lot of the strategies that they have, in addition to just being better informed and then being able to anticipate what's going to happen next better, because if you have an idea of what's coming next, rather than being surprised, you can lower the cost or enhance the opportunity of what happens outside your company's decision-making structure.

But also there's some common themes: diversification of supply is important. When there's a chance that policy is going to get in the way of your current supply chain, you want to have a more diversified supply chain. Sell to more locations if you can profitably do so; Share financial risk through partnerships and diversifying your corporate financial dependency on specific business models; so that again, you're hedging against possible likelihoods.

And then unfortunately, overall, a slowdown and reluctance to take big bets in this kind of environment, and that's where uncertainty and policy ends up slowing down economic growth, because when—and you see this most dramatically in the US-China economic relationship, where the trade numbers have dropped dramatically—but what's been really shocking, or maybe not shocking but notable, is the degree to which cross-border investment between the U.S. and China has pretty much evaporated. And that's entirely not because there's no opportunity if you did so, but because the risks involved and the perceived risks involved and actual policy interference on both sides, making investment more difficult and more risky, more difficult, less profitable. Therefore, less investment. What happens with less investment? Slower growth. And then that's where we are.

Jersey Lee

Moving back to your previous position as Council General to Hong Kong and Macau, towards the end of that tenure, you saw how the 2019 Hong Kong protests started. So what struck you then? And did you expect things to evolve the way it eventually did?

Kurt Tong

My way of explaining Hong Kong, which is a very, very complicated place and somewhat unique in its situation, was that two things were happening, two long-term trends were happening simultaneously.

One was increased expectations on the part of the Hong Kong population for a lot of the same political practices—what I consider best practices—of contested elections and direct voting and more involvement in decision-making, greater transparency, et cetera, in how decisions were made. Hong Kong's starting point from global standards on that front was not bad, but it was short of being a full democracy. After 1997, it became part of the People's Republic of China. But people's expectations for and hopes for greater autonomy, including political autonomy, were increasing.

At the same time, from the PRC side, from the Beijing side, the tolerance for Hong Kong being so visibly different from the mainland in terms of its political norms and practices and behavior was going down; these lines eventually crossed, episodically 2003, 2014, 2015 and then 2019 and 2020, most dramatically in 19, 20, where the PRC government stepped in, and through the act of imposing a national security law, took away a lot of the political differences between Hong Kong and the mainland, at the same time as attempting to keep most of the economic secret sauce of Hong Kong going, following the long-term trends and the legacy rules that were ultimately inherited from the UK originally.

So those lines crossing, I've thought about this a lot, and eventually I need to write something about it, but those lines crossing in 2019; I'm not sure it had to happen then, and it was happening, as you noted, just as I left the city in July of 2019 and there were decisions made by the Hong Kong government to push forward with a very unpopular piece of legislation, which ultimately was never enacted, that caused a lot of people to lose trust in the government, and that snowballed and became a situation of evident political instability that the government Beijing government was not willing to tolerate. And so that's where we ended up.

Richard Gray

We wanted to close our conversation today, staying on Hong Kong. So I haven't talked about this publicly before, but I was actually supposed to move to Hong Kong. During my studies, I focused a lot on Asia policy, interning in the U.S. government and in certain think tanks.

As I was moving towards that moment, moving to Hong Kong felt like the chance to apply what I'd learned from the outside looking in, as a window to piece together something misunderstood and try to give it clarity. And as people with profiles like mine were abandoning the city, I sort of thought in my own head that that gave it more importance to go, but also try to stay for at least the medium term to seep in the city and try to grapple with its relations with China, with its own history, in the geopolitics of the city's daily existence.

And unfortunately, in my case, it's just a microcosm of many that wasn't meant to be. There were pretty significant complications in the work visa process. In a combination with a lot of things, this was just a recognition about where these people-to-people exchanges are at today, and the pretty high barriers and restrictions of them actually fully coming into form.

And so, Ambassador Tong, I'm sure you've had a lot of experience with individuals who have had visas denied or revoked or things of the sort, people-to-people exchanges being eroded. In a broader sense, how do you think about that playing out? And in particular, with the importance of the U.S.-China relationship, it seems much more difficult for people to make that entry point into greater China, and to try to build some of that expertise and knowledge. And the ramifications of that, both for the relationships between our two countries, but also in the United States, just to make more informed decisions, seems pretty substantively eroded.

Kurt Tong

I don't know the circumstances of your personal situation, but I respect your willingness to frame it as a broader problem than a specific one that's specific to Hong Kong or your own personal circumstances.

I am concerned that—the key word here I think is suspicion—the suspicion that is prevalent on both the U.S. side and the China side, and it's not just the U.S. and China, but let's simplify it and just talk about the U.S. and China, that that suspicion is leading governments to be more tight-fisted in allowing people to travel than was previously the case.

I don't want to get into the details because it'll sound like whataboutism, and I hate whataboutism and false equivalencies and all that kind of stuff, but I'm distressed, looking at my own government on actions like the pulling back of Fulbright activity, grants and activities, the current policies in the United States with respect to student visas, especially when there's linkages being made between those policies and freedom of expression. As an American citizen, I'm quite disturbed by those.

I'm not a Chinese citizen, so I don't have as much standing to speak about that, but I think China does have some significant problems in their approach to this as well. And I'm worried that there are lower numbers of students in particular. There's still a large number of Chinese students coming to the United States because we have a great educational system, there's a lot of educational opportunity, right? And there's just a residual institutionalization of that. But the numbers are declining. And the numbers of Americans studying or exploring or even being tourists in China has not recovered post COVID the way that I at least would hope would be the case.

There's quite a small number of people doing long-term academic study in China; that is going to ultimately lead to fewer people of one country who understand the other. Again, just simplifying it bilaterally—it is a lot more complicated than that—but that worries me.

I'm part of an NGO called International Student Conferences that is organizing—I'll do a little advertisement here—organizing a student conference, the delegate selection process is already over for this year, but hopefully we'll have another one next year, of students traveling between the countries, between the US and China, and learning from each other in a fairly open format of no restrictions conversations, the only restriction being that everyone be respectful and listen as much as they speak. And that looks like it's going to be a successful venture. It's going to China for the first time in a couple weeks.

That gives me hope that there can be, through small actions like that, private sector activity, where people and individuals realize that they want to be part of the cadre of folks who understand from one country to the other, that can recover, just because of the demand signal. Even if the governments are shading towards suspicion rather than promoting that kind of activity.

Jersey Lee

Yeah, we certainly hope for more contact and people-to-people exchanges. Thank you for joining Pacific Polarity, Ambassador Kurt Tong.

Kurt Tong

My pleasure. Good luck with you guys in your studies and careers

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